[PEN-L:8] Re: Japanese recession rocks world economy (fwd)

[Rosser Jr, John Barkley]

     Well, we have had considerable discussion of the 
Japanese situation on this list.  But a few observations:
     1)  It is ironic that in a world where supposedly 
Keynesianism is dead and New Classical economics (or its 
half-baked New Keynesian cousin) is dominant, we hear 
nothing but cries for Keynesian-style fiscal policy 
expansions, either tax cuts or spending increases.  It is 
unclear either will work, even if vigorously applied.  
Because of their job fears, Japanese consumers may just act 
like Barro/Ricardians and save any tax cuts.  And it is 
unclear what the government can spend on, more bridges to 
nowhere as in Kobe?  Much of such spending runs through the 
corrupt construction sector which does not help much.
     2)  My old "pal" Paul Krugman has recently called for 
monetary expansion in Japan, "printing yen."  Well now.  
Interest rates are already at rock bottom levels, nearly 
zero on short term and about 1 and 3/4 on long bonds.  
Can't go much lower.  Looks like a classic Keynesian 
liquidity trap.  Again, expansionary monetary policy will 
be just "pushing on a string."  Businesses won't invest, 
consumers won't spend.  Arguably triggering inflation might 
lower real interest rates, but will this spark animal 
spirits?
     3)  It is also unclear that all the called-for 
restructurings will do anything either.  Presumably the 
model is the US S&L deal: shut a bunch down while paying 
off investors, restructure others, all under government 
oversight and paid for by borrowing.  Could be done, but it 
won't help in the short-run.
     Bottom line:  This is indeed serious business, and 
quite a few of us have long been saying that Japan was/is 
the key to what really happens in the "Asian crisis."
     Below the bottom line:  In the longer run I wouldn't 
rule Japan out at all.  It still has very strong 
fundamentals of many sorts.  Don't forget that the leading 
world creditor of the 1920s took the world into a Great 
Depression only to come out of it as the clearly dominant 
world economy (no, I am not predicting that outcome for 
Japan, but the current bad-mouthing is overdone).
Barkley Rosser
On Sun, 14 Jun 1998 16:21:02 -0700 (PDT) 
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> Date: Sun, 14 Jun 1998 15:55:28 -0700
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> Subject: Japanese recession rocks world economy
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> The Globe and Mail                                    Saturday, June 13, 1998
> 
> JAPAN'S STUMBLE FELT AROUND GLOBE
> 
>       Recession humbles former economic superpower
> 
>       By Barrie Mckenna
> 
> WASHINGTON -- It's been a slow awakening, but any Canadian trying to buy
> U.S. dollars lately has felt the force of a financial crisis that until now
> may have
> seemed a distant echo.
> 
> Trampled by a stampede of global investors to the United States, the Canadian
> loonie sank this week to 67.97 cents (U.S.), the lowest in its 140-year
> history.
> And you can blame Japan for everything.
> 
> Yesterday, Japanese officials confirmed what economists have been warning for
> months: The world's second-largest economy and motor of Asia is mired in a
> full-blown recession. Preliminary results show that Japan's economy shrank a
> breathtaking 5.3 per cent in the first three months of this year. That,
> combined
> with a 1.4-per-cent contraction in the last three months of 1997, certifies
> a grim
> prognosis that will continue to send shudders around the globe.
> 
> That's why, when investors fleeing Japan look for a safe place to park their
> money, the United States seems more attractive than Canada with its
> dependence on commodities such as lumber and metals, and its low interest
> rates.
> 
> A common misconception is that the Asian crisis, now nearly one year old,
> originated in Thailand with the collapse of its currency.
> 
> The truth is that the problem began -- and ultimately, must end -- in
> Japan. The
> world's greatest lender nation is on its knees.
> 
> Its banking system is near collapse; its economy is shrinking for the first
> time in
> 30 years, and the yen, already down nearly 45 per cent against the U.S. dollar
> since mid-1995, is in a free fall.
> 
> How Japan wrestles with those problems will have a profound effect on Canada
> and the rest of the world. If the current trend persists, economists warn of a
> North American stock-market crash, an even weaker Canadian dollar in the
> months ahead and an ever-rising tide of cheap Asian imports.
> 
> "Japan is the No. 1 strategic issue facing the world economy right now," said
> Kenneth Courtis, a Canadian and chief economist at Deutsche Bank Group in
> Tokyo. " . . . The locomotive of Asia is pulling backwards rather than
> forwards
> and that means that, in effect, Japan is exporting its deflation to its Asian
> neighbours, and indeed, to the world economy."
> 
> Flash back to 1990. The Japanese economic juggernaut seemed unstoppable.
> Japanese investors were bidding up prices for virtually everything around the
> world -- for real estate, stocks and even Van Goghs. The Imperial Palace, a
> few
> hectares of Japanese gardens and thousand-year-old walls in central Tokyo, was
> informally valued at more than the real-estate value of all of Canada and
> roughly
> the same as California.
> 
> But the inflation bubble soon burst. Real-estate prices tumbled, stocks
> fell and
> massive amounts of wealth disappeared in Japan in the early 1990s.
> 
> However, someone apparently neglected to tell Japanese bankers and policy
> makers about the reversal. They continued as if nothing were amiss. Through
> the mid-1990s, Japanese banks ignored their bad loans at home and made even
> riskier ones elsewhere in Asia. This dangerously overheated economies such as
> Thailand and Indonesia.
> 
> When those countries' currencies -- all tied to the U.S. dollar -- nose-dived,
> creditors simply could not pay back the Japanese banks, and the game was over.
> Now analysts are tallying up Japan's debts, not its assets. Bad loans held by
> Japanese banks are estimated to be worth in excess of $1-trillion (U.S.).
> That's
> about twice the size of Canada's economy.
> 
> To make matters worse, the Japanese government embraced fiscal conservatism
> just as the economy was finally showing some signs of life. Last year, Japan
> raised its sales tax and passed a law to balance its budget by 2002. It was
> dangerous medicine for an already feeble economy.
> 
> Now, in a delayed reaction to some of those miscues, the yen is also
> collapsing.
> 
> "This is Japan catching up to the devaluation of some of the other Asian
> currencies," said Avery Shenfeld, senior economist at CIBC Wood Gundy in
> Toronto. "An ill-advised decision to tackle their deficit put them further
> behind
> than when they started."
> 
> Still, Japanese consumers and many corporations were quicker to grasp what
> their government apparently did not. Abandoning the system of lifetime
> employment, companies began to lay off workers and curb hiring. The jobless
> rate has soared to a postwar high of 4.1 per cent. That's low by Canadian
> standards, but the way Japan calculates its statistics probably understates
> the
> severity of the problem.
> 
> For many working Japanese, salaries and bonuses are now falling. This has
> further shaken consumers.
> 
> In the meantime, the effects of Japanese Prime Minister Ryutaro Hashimoto's
> earlier conservative financial policies, such as the higher sales tax,
> continue to
> hurt. And some of the sectors most in need of a shakeup -- banking and
> construction -- have yet to address their problems. Dozens of companies, while
> technically bankrupt, continue to operate because the banks won't let them
> fail
> for fear of causing layoffs and disclosing soured loans.
> 
> News that Japan is in a recession is no great surprise to anyone living on
> Canada's West Coast. In British Columbia, where about a third of the economy
> is tied to Asian exports, the effects have been particularly severe.
> Economists
> say the province is probably already in a recession of its own.
> 
> Over all, Canadian exports to Japan plunged 38 per cent in the first
> quarter. The
> Asian economic collapse has also dragged down prices for many of the region's
> key exports. Japan and its Asian neighbours once consumed a disproportionately
> high share of the world's basic commodities such as lumber, steel and oil.
> That
> has, in turn, depressed prices for those goods.
> 
> In the mid-1990s, Japan was the land of opportunity for companies like Douglas
> Homes Ltd. of Vancouver. Japan had a severe housing shortage and some of the
> wealthiest consumers in the world. In the good times, Douglas sold 200
> prefabricated, Canadian-style homes a year in Japan. This year, the company
> will do better than most B.C. home builders by selling slightly more than half
> that number, relying on its good Japanese business partners and reputation for
> quality products.
> 
> "It's not really the currency. It's consumer confidence," explained Scott
> Ando,
> the company's general manager. "People in Japan are scared to take the risk of
> buying a new home because they are worried they might lose their job. There's
> no job security any more."
> 
> How to get Japan back on track is the topic du jour among analysts, economists
> and investors. For months, they have pleaded with the Japanese to recharge
> their
> stalled economy by slashing taxes, increasing government spending and freeing
> up tightly regulated areas of its economy.
> 
> In mid-April, Mr. Hashimoto responded with a 16.5-trillion-yen stimulus
> package ($174-billion Canadian). But parliamentary approval has bogged down
> and the money won't actually start flowing until later this year.
> 
> "Fiscal measures taken to date are too small to turn the economy around,"
> economists Jeffrey Young and Tomoko Fujii of Salomon Smith Barney in
> Tokyo warned in a report this week.
> 
> The package sounds a lot and it is. But it won't be enough to stop Japan's
> economy from shrinking as much as a full percentage point for the full year,
> further depressing the yen, economists say. Deregulation is an even longer
> haul.
> 
> Meanwhile, Japanese officials insist they can't prop up the yen without help
> from the United States, which seems happy to let the U.S. dollar continue to
> rise. Indeed, U.S. Treasury Secretary Robert Rubin is taking the tough-love
> approach to Japan, insisting this week that the responsibility for the
> latest jolt
> from Asia rests squarely with the Japanese.
> 
> "The weakness of the yen reflects the economic conditions in Japan, and can
> only be remedied by restoring economic strength in Japan," Mr. Rubin told a
> Senate hearing in Washington on Thursday.
> 
> A Toronto-based money manager who specializes in Asia said he has virtually
> written off Japan.
> 
> "I have been following Japan for 10 years now," he lamented. "It's essentially
> been stagnant and they still have yet to face up to the real problems . . .
> They
> are probably the shortest-lived economic superpower in history."
> 
> 
> 
> 
> -- 
> Michael Perelman
> Economics Department
> California State University
> Chico, CA 95929
> 
> Tel. 530-898-5321
> E-Mail [EMAIL PROTECTED]
> 

-- 
Rosser Jr, John Barkley
[EMAIL PROTECTED]